Monetary policy will remain stable to balance the risks on growth and inflation in Malaysia

Monetary policy will remain stable to balance the risks on growth and inflation. Inflation reading has thus far been lower than expected. Latest October CPI inflation reported a 2.5% (YoY) rise. The combined impact of the GST and the weaker currency has been significantly less than expected. This probably can be attributed to the persistently low energy prices. With oil prices expected to remain low in the near future given the lack of demand, full year inflation will likely average just 2.1%, lower than the previous forecast of 2.4%. 

However, a low base will set in over the first six months of 2016. This should see headline inflation rising above the 3% level. But this is purely technical and transient in nature. Inflation will ease going into 2H16, which will deliver a full year average inflation of 2.8%. 

With growth momentum easing and inflation set to be higher, monetary policy will have to track the middle ground. That is, Bank Negara will continue to maintain a stable monetary policy stance. The central bank is expected to keep the Overnight Policy Rate (OPR) at 3.25% for the whole of 2016.